CDP

Business Context and Reporting Period

Company: Corporate Office Properties Trust (COPT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2007
Business Overview: COPT is a fully-integrated, self-managed REIT focused on acquiring, developing, and leasing Class A suburban office properties, primarily in the Greater Washington, D.C. region. As of June 30, 2007, the portfolio included 229 wholly owned operating properties (17.7 million sq. ft.), 21 properties under construction/development, and 1,362 acres of developable land.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 18.7% to $202.4 million (six months 2007) from $170.4 million (six months 2006), driven primarily by the Nottingham Acquisition and new construction.
• Net Income Decline: Net income available to common shareholders decreased 54.0% to $5.4 million from $11.7 million. This decline was due to increased depreciation/amortization from new acquisitions, higher interest expense, and the absence of a $2.4 million gain on property sales recorded in the prior year.
• Debt Expansion: Total debt increased to $1.75 billion from $1.50 billion, reflecting financing for the Nottingham Acquisition and ongoing development.
• Occupancy: Total occupancy for wholly owned properties was 92.7%, slightly down from 92.8% at year-end 2006, impacted by the lower initial occupancy of the Nottingham Acquisition properties (85.7%).

Outlook, Management Commentary, and Risks

Major Transactions

On January 9-10, 2007, COPT completed the Nottingham Acquisition for $366.8 million, adding 56 operating properties (2.4 million sq. ft.) and 187 acres of land in Maryland. Financing included the issuance of common shares ($156.7 million), Series K Preferred Shares ($26.6 million), and debt borrowings.

Development Pipeline

Construction is underway on ten office properties totaling 1.0 million sq. ft., which are 48.5% pre-leased. Development activities are also active on 12 new properties (1.3 million sq. ft.) and four redevelopment projects.

Risks and Contingencies

• Leasing Uncertainty: Management notes uncertainty regarding the leasing outlook due to new supply in the market and competition, though the weighted average lease term of five years provides short-term protection.
• Interest Rate Risk: 16.6% of total debt carries variable interest rates. A 1% increase in short-term rates would have increased interest expense by $1.4 million for the six-month period.
• Legal Proceedings: An appeal is pending regarding the Fort Ritchie acquisition (Case No. 1:05CV00949), though the district court previously dismissed the case due to lack of standing.
• Environmental Indemnity: COPT has agreed to indemnify a tenant for environmental issues at three New Jersey properties, with caps ranging from $1.5 million to $12.5 million depending on the specific obligation.

Investor Verification Checklist

• Nottingham Acquisition Integration: Verify the pace of lease-up and occupancy improvement for the 56 newly acquired properties, which currently drag down the overall portfolio occupancy rate.
• Debt Maturity Profile: Review the schedule of debt maturities, noting that $36.6 million of fixed-rate debt and $49.4 million of variable-rate debt are scheduled to mature in 2007 (some extendable).
• Development Costs: Monitor the $93.5 million in remaining costs for current construction projects and the $265.8 million estimated for development activities to ensure funding sources (credit facilities) remain adequate.
• FFO vs. Net Income: Analyze the divergence between Net Income ($13.4M) and FFO ($67.1M) to understand the impact of non-cash depreciation and amortization on reported earnings.
• Preferred Share Dividends: Confirm the sustainability of dividend payments on the newly issued Series K Preferred Shares (5.6% annual rate) alongside existing preferred series.